Tag: Industry Insights

Q1 Industry Insights: Consumers Will Consume, Lenders Will Lend, Delinquencies Will Rise

By on March 31st, 2022 in Industry Insights

It’s the end of the quarter and, as always, we at TrueAccord are looking at consumer debt trends that will impact our industry and beyond. The four key trends we’re studying are: resumed foreclosure activity, extensive medical bills, the end of child tax credits and historically high inflation. Add these all together and the financial outlook for consumers, especially those in debt, is scary.

But there are silver linings, as well. For one, the consumer credit market is looking strong with signs of expansion, specifically,  originations for credit cards and personal loans are increasing. Second, the fintech industry continues to grow and evolve to meet the changing needs of consumers, offering more opportunities for financial inclusion and innovative customer experiences.

The Downside

Look, coming out of a pandemic and into a tumultuous international economic situation, we don’t expect it to be easy. But some definitely feel it more than others. For many families, government stimulus through child tax credits (which ended in December) was helpful in covering the gaps in income from pandemic losses, but it wasn’t enough to prepare them to take on new expenses and restart all the financial obligations that were temporarily on hold. In fact, a recent report from the Columbia University Center on Poverty & Social Policy found that 3.7 million U.S. children were plunged back into poverty by the end of January when child tax credits expired, indicating that the stimulus was making a significant financial difference for many families.

In January, the foreclosure proceedings that were paused under the CARES Act resumed after an 18-month hiatus. In January alone this amounted to 56,000 foreclosure starts, up 29% from the month prior. But that doesn’t tell the whole story: 964,464 mortgages are still seriously delinquent and not in forbearance, with 49% in loss mitigation plans. Even more concerning, of those 474,071 borrowers in loss mitigation, 72% just aren’t paying.

The average American household is now paying an additional $276 per month on expenses thanks to record-high inflation. And don’t forget pandemic-related medical expenses from Covid-19 testing and treatment. A recent survey found that 56% of Americans, with or without insurance, owe health-related debt, and almost one in six people with medical bills aren’t paying them off.

And it’s not just medical bills. According to Experian’s latest Ascend Market Insights, February marked the 9th month in a row with increasing 30+ delinquency rates on a unit basis across debt types. Their data shows that 30+ day past due accounts showed a 7.59% increase month over month with notable delinquency increases in first mortgages, second mortgage, auto leases and unsecured personal loans. Additionally, month over month views of roll rates show 0.91% of consumer accounts were rolling into higher stages of delinquency in February 2022. This indicator has now returned to the same level as the start of the pandemic in March 2020. 

While student loan payments are still paused through May, the day is quickly approaching when many will see their financial obligations increase yet again, compounding the burden and financial pressure on consumers.

The Upside

In spite of the challenging economic landscape, the good news is that consumers now have more options when it comes to lending and personal finance, and they’re taking advantage of them. Higher costs of living and, for some, sustained unemployment (partially influenced by the Great Resignation) are driving consumers to look for new lines of credit to manage expenses. According to TransUnion, originations for personal loans are expected to continue rising in 2022 to both non-prime and prime and above consumers, reaching pre-pandemic origination volumes last seen in 2019, while credit card origination and balances will hold steady near pre-pandemic levels.

And lenders are happy to lend. Between extra cash on hand from government stimulus, pauses on many financial obligations and new cash flow budgeting options like BNPL taking the payments industry by storm, consumers actually did a pretty good job managing their finances in regard to repaying debts during the pandemic. Delinquencies were at record lows, causing lenders to become more comfortable serving subprime segments that were performing well. As a result, originations for credit cards and personal loans have returned to pre-pandemic levels and have been holding fairly constant over the last two quarters.

This bodes well for financial inclusion and the bevy of fintechs looking to get in on the action. From eCommerce and retail to banking and money transfers, every sector features a fintech company that’s innovating digitally to provide more people with better financial access and positive customer experiences. A recent report by Plaid includes key findings about what consumers want from their financial services: 1) apps and services that work when and how they want and that make it easier to manage money, 2) interoperability, with apps and services providing connected experiences, regardless of the providers, and 3) services that not only help them save money but achieve better financial outcomes. And guess what? Fintech companies are delivering. According to research from Bloomberg, fintech companies now originate 38% of U.S. unsecured personal loans, with a large presence in the mortgage and auto loan categories.

Boiling This All Down

Remember when stimulus money was flowing, consumers weren’t spending as much (because what was there to do?) and instead taking the opportunity to pay off loans and debt and save at record rates? Those times are gone and signs show that consumers are looking to use more credit and take on new loans in response to economic pressures. Unfortunately, a rise in originations will inevitably lead to a rise in delinquencies, especially in a challenging and unpredictable economy. Knowing what comes next, now is the time to start thinking about pre-default and keeping consumers on track with payments and out of collection.

For lenders, this means engaging delinquent customers early on when the first signs of slippage occur, and how you do that is important. Consumers today expect a seamless, personalized experience in every financial transaction, and the right recovery operations can continue to deliver that all the way through the customer journey when you have the right strategy in place. If you don’t know where to start in building a strategy, our Recovery & Collection Starter Kit is a good place.

How to Use Recovery KPIs: Your Keys to Building a World-Class Strategy

By on February 17th, 2022 in Industry Insights
TrueAccord Blog

Measuring the success of a recovery strategy goes beyond just the dollars and cents recovered. Yes, the goal of a recovery operation is to maximize profitability by efficiently recovering money lent to consumers, but other key factors — like consumer experience and retention — are also important in evaluating the success of your business.  

A recovery team could theoretically chase down every last delinquent dollar, but doing so is often not worth the  operational cost of the effort, and the associated legal and reputational risk can cut into profitability. 

In this blog post, we’ll share the most important key performance indicators (KPIs) for collections and recovery — and how you can use them to create a seamless, scalable, and world-class recovery practice. 

Meet the Metrics 

Whether looking at portfolio performance, operational profitability, or consumer experience, different KPIs play a role in measuring the success of a recovery strategy. Collectively, these metrics make up the “language” of recovery and collection — helping organizations understand the fundamentals of their operation.

Here are a few of the most integral metrics to know:

Accounts per Employee (APE) or Accounts to Creditor Ratio (ACR): the number of delinquent accounts that can be serviced by an individual recovery agent 

Net Loss Rate or Net Charge Off Rate: measures the total percent of dollars loaned that ended up getting written off as a loss

Delinquency Rate: total dollars that are in delinquency (starting as soon as a borrower misses a payment on a loan) as a percentage of total outstanding loans – often an early warning sign on the total volume of delinquent debt

Promise to Pay Rate: the percentage of delinquent accounts that make a verbal or digital commitment to pay

Promise to Pay Kept Rate: the percentage of delinquent accounts that maintain a stated commitment to pay

Roll Rate: the percentage of delinquent dollars that “roll” from one delinquency bucket to the next over a given period of time – provides visibility into the velocity with which debts are heading into charge off

Profitability of a Collections Operation Formula: R x ResF x E 

R [Reach]: percentage of consumers in delinquency can you actually reach 

ResF [Resolution Funnel]: how effectively you can convert initial contact with a consumer into a commitment to pay – and ultimately, a payment promise kept (see Promise to Pay Rate and Promise to Pay Kept Rate) 

E [Efficiency]: calculation of what the “unit economics” of your collection are and how much it costs, on average, for every account that you rehabilitate

The following diagram highlights the relationship between these core operational metrics of a recovery strategy and portfolio-level outcomes.

In the hyper-competitive financial services space, consumer experience is a source of competitive advantage. That’s why it stands to reason that alongside the “traditional” metrics we see above, forward-looking fintechs and lending organizations should include KPIs that measure the value of consumer experiences:

Net Promoter Score (NPS): how likely a consumer is to recommend a given brand after an experience with a brand’s collection organization

Customer Retention Rate: how likely a consumer is to be reacquired by a given brand after his or her delinquent account is rehabilitated

How to Make the Most Out of These Metrics

So you have traditional metrics and consumer-focused KPIs, but how do you use it all? Managing performance with operational and consumer-centric metrics requires understanding the economics of recovery. Successful organizations will use the data to measure trends against the company’s own historical data, evaluate partners and strategies, and understand the big picture.

Understand the Big Picture

Visualize the relationship between operational metrics and portfolio-level outcomes. Conduct scenario planning exercises (e.g., “if we were able to improve the reach of our efforts by 25% through digital outreach, we would be able to reduce our net loss rate by 750 basis points”).

Measure Trends Longitudinally

Benchmark against a company’s own historical data as the collection team rolls out new strategies and tactics (e.g., “we boosted our promise to pay kept rate by 350 basis points relative to the previous vintage with pre-payment date reminders”)

Evaluate Partners

Assess potential collection vendors against a standard slate of metrics and KPIs (e.g., “of the three vendors that we evaluated for our collections, which one led to the greatest reduction in roll rate?”)

Moving Towards World-Class Recovery 

Understanding collection KPIs and how to use them is a critical part of creating an effective recovery strategy — learn about all the components of a successful collection operation in our new ebook, the Guide to World-Class Recovery. Available for download now, this ebook provides the tools and frameworks to ensure that you’re architecting the right recovery strategy for your company for the long run. 

Download the Guide to World-Class Recovery»

The Digest: December 2020

By on December 17th, 2020 in Industry Insights

Between the COVID-19 vaccine rollout, a potential second stimulus package, and the incoming Biden administration, big changes are upon us in the United States. How will these changes impact the worlds of finance, fintech, and collections? Here are the headlines we’re watching as we consider the changes to come in 2021:

• As we covered in November, the CFPB’s new debt collection rule signals a continued shift towards more protections for consumers in debt. With the incoming Biden administration, more regulatory news from the CFPB could be imminent, including announcements of more aggressive oversight of the student debt industry and regulations to help homeowners who are facing foreclosure.

• According to Bloomberg, “Americans’ household finances are in the best shape in decades,” despite the surging pandemic. While 2020 has been much harder on working-class families, data from the Federal Reserve shows that “they too have more money in the bank now.” Unfortunately, this good news regarding household finances is complicated by the recent jump in unemployment claims and an increase in food insecurity among low-income families.

• Lawmakers are currently in stimulus negotiations, which means some financial relief could be on the way for families and businesses. Even if a deal is not achieved in the coming weeks, the Biden administration has indicated that “it will push for a multi-trillion-dollar package in 2021,” according to Business Insider. As we’ve noted, a large stimulus could have wide-ranging effects on consumer finances, including a possible sharp increase in debt repayment.

• On the fintech front, we are still closely watching the rising success of BNPL (Buy Now Pay Later) startups, such as Affirm, Afterpay, and Klarna. PYMNTS.com recently released a study, Buy Now, Pay Later: Millennials and the Shifting Dynamics of Online Credit, that sheds light on the audience factors encouraging this emerging landscape. As we’ve noted before, flexible payment options can be a real win-win: better for the customer experience, as well as a positive for payment plan retention.

The Digest: The CFPB’s New Debt Collection Rule

By on November 19th, 2020 in Industry Insights

In this edition of The Digest, we’re zooming in on a topic making headlines in the world of collections: the new CFPB debt collection rule. We sat down with TrueAccord’s Chief Compliance Officer Tim Collins to get his initial thoughts on what the new rule will mean for the collections industry, and how it may open new doors for better relationships between collectors and consumers.

Tim, thank you for sharing your thoughts on the long-awaited new CFPB debt collection rule. It’s the first big change to the FDCPA since 1977, and it provides new “rules of the road” for collections. What are some of the top takeaways for the collections industry?

As you said, this is the first major change to the FDCPA in over forty years. The new rule is meant to help the collections industry adapt to all the exponential changes in technology, communication, and consumer behavior that have happened since then.

To some degree, there is still a focus on regulating the more traditional world of call-and-collect agencies. There are new guidelines around call caps. They also put in a clearer definition of limited content messages, which was a topic that the industry was looking for guidance on. In general, there are now clearer instructions on the means by which a collector can reach a consumer.

Beyond the world of call-and-collect agencies, the new rule opens doors for better digital communications with consumers—email, SMS, etc. There’s a huge focus on consumer preference. The new rule is clear: the consumer has the right to tell you when is a good time for them to be contacted, and they have the ability to tell you what communications channels work best for them. All of that is very much in line with what we already do—and have always done—at TrueAccord.

The new rule is clear: the consumer has the right to tell you when is a good time for them to be contacted, and they have the ability to tell you what communications channels work best for them.

I know TrueAccord was influential in issuing comments that were ultimately incorporated into the rule. Can you tell us a bit about that?

We’re proud to have been involved in providing public comments to the rule around the use of email in collections. We were able to share our insights on how emails should be sent, why email is convenient for consumers, the advantages of email with opt-out, and other dimensions of a successful, compliant email program.

[Editor’s note: for more insights from TrueAccord on using email in collections, check out our new whitepaper co-authored with Experian: What to Know When Adding Email to Collections: The Ultimate Guide]

It’s important to note that the new rule won’t take effect until late 2021, and there’s a lot that could change between now and then in the United States. So, there’s still some degree of uncertainty about how the rule will be implemented.

That’s right. There’s a lot of things that could happen between now and when the rule becomes effective. Also, we’re still waiting for part two of the rule to come out. That will likely happen in December.

So yes, there’s a lot that we still don’t know, and a lot that could change. There’s even a chance the whole rule could be tossed out, though that is unlikely. But right now, the new rule gives us a vision and a direction about where the industry is headed— and that is towards better alignment with consumers, more protection for consumers. That’s part of the CFPB’s mission, and that’s part of our mission as well.

This interview has been edited and condensed for clarity.

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TrueAccord’s compliance and digital collections experts are available to talk more about the CFPB’s new debt collection rule and what it will mean for the collections industry. Start a conversation with our team to learn more.